Good comments, Chester. I'm of the opinion that the TURF IPO is nothing more than a well orchestrated scheme to prop up the parent company. Check out these "intercompany agreements" that have just kicked in now that the IPO is complete:
iTurf will pay our parent a royalty equal to 5% of our net sales from iTurf Web sites bearing a trademark licensed from our parent.
TURF sells any DLIA gear through their web site they pay a "royalty" back to the parent. Something like 74% of TURF's revenues last year were from the sale of DLIA merchandise. This deal effectively increases what TURF pays DLIA for goods by 10% since it's based on TURF's selling price.
Our parent will continue to supply inventory to iTurf. We will pay our parent an amount equal to the lesser of
o 105% of our parent's cost for the inventory, including cost of freight and all direct costs charged to our parent by its suppliers, and
o the best price at which our parent could resell those products to a third party.
TURF now paying DLIA's cost + 5% in the post IPO world when they used to get the stuff at DLIA's cost pre-IPO. Add in the royalty and TURF is now paying 15% more than they used to pay for DLIA merchandise. Ouch.
Our parent will continue to provide all of the services it currently provides to iTurf, other than warehouse and fulfillment services, such as merchandising, inventory management, customer service, creative, marketing, technical, human resources, finance, accounting, administrative, legal and other services, as well as those services iTurf requires by virtue of its status as an independent public company. Our parent will provide these services to us at 105% of its cost.
So, overhead used to be charged out at cost, now it's cost + 5% Anyone else seeing a pattern here?
Our parent will continue to provide warehousing and fulfillment services, including receiving, quality control, storage, picking, packing and shipping of inventory and processing of customer returns. We will pay our parent an amount equal to its average cost per package shipped multiplied by the product of the number of packages shipped by us and 105%, taking into account all of our parent's warehousing and fulfillment costs, including rent, depreciation and operating expenses.
Again, cost + 5% Remember TURF continues to be a subsidiary of DLIA. There they aren't getting anything additional from DLIA, just paying 5% more for the same goods and services.
Pursuant to the intercompany services agreement, we will commit to purchase substantial amounts of advertising in our parent's print catalogs. These amounts of advertising are materially greater than we have used in the past. We cannot assure you that this advertising will effectively attract users to our Web sites or lead to a substantial amount of sales.
Pursuant to the intercompany services agreement, our parent has agreed to provide us with advertising and promotional space in its catalogs and retail stores. In addition, we are required to purchase from our parent minimum amounts of advertising space in at least 50% of all of our parent's catalogs distributed each year. However, our parent controls the timing and placement of these advertisements and promotions.
Let's see, 60 million catalogs, $40 per 1,000 mailed, looks like TURF could be sending their proud papa up to $2,400,000 for catalog advertisements each year. Kinda funny when you realize that TURF's entire SG&A line was $1,506,000 in 1998. You'd think that for $2,400,000 TURF would have some say over the timing and placement of the ads, nope, DLIA decides when the ads will run. Doesn't exactly sound like an arms length transaction now does it?
Also have to wonder how much true value TURF is gonna get from these ad dollars since many on DLIA's mailing list are already well aware of the existence of iTurf's various web sites.
drakes353 |
